The NewStandard ceased publishing on April 27, 2007.

Proposed Pension Bill Opens Escape Hatch for Reluctant Providers*

by Michelle Chen

Critics say politicians looking to "reform" an ailing retirement system are actually enouraging companies to abandon pensions in favor of profits, leaving behind the workers and seniors who rely on them.

*A correction was appended to this news article after initial publication.

Apr. 13, 2006 – While the nation’s pension system creaks with age, Congress is finalizing legislation designed to rescue retirement benefits from a projected financial crisis. But the proposed reforms have drawn criticism from advocates for workers and retirees, who say that Washington is more interested in reducing government and corporate liabilities than preserving a source of retirement security for millions of Americans.

Email to a Friend
Print-friendly Version
Add to My Morning Paper

Legislative fixes have gathered steam in the wake of high-profile pension failures tied to the recent economic downturn; in the steel and airlines industries in particular, tens of thousands of employees saw their benefits terminated.

Alarmed lawmakers warn that the federally administered Pension Benefit Guaranty Corporation (PBGC), which backs up private pensions and bails them out when they collapse, may be pushed toward insolvency unless tighter funding requirements are imposed on companies. The agency estimated last fall that the private sector pensions it backs were underfunded by $450 billion.

Pension-reform bills passed in both chambers of Congress and now under negotiations in a conference committee, would increase employers’ obligations to cover benefits for current retirees as well as projected future pensions.

But labor groups and some analysts predict the reform legislation will in many ways hurt more than it will help, by insufficiently addressing corporate abuses, undermining the power of unions to advocate for better benefits, and in the long run, making the pension system so financially unpalatable as to drive companies away from offering pensions altogether.

Turning Benefits into ‘Risk’

Labor groups say that instead of expanding corporate accountability, the reforms would reduce workers’ leverage over their contracts.

To stem "volatility" in the pension system, both the House of Representatives and Senate have moved to restrict companies from providing or pumping up certain types of benefits if their plans are deemed financially "at risk" or under-funded.

For instance, if an employer has not paid enough to keep its pension plan more than 60-percent funded, the proposed rules would automatically "freeze" the pension. Under a pension freeze, employees typically stop accumulating earned retirement benefits, which normally grow over the course of their career.

Dallas Salisbury, president of the centrist think tank Employee Benefit Research Institute, predicted that the more restrictive funding rules "would make it more likely that employers would freeze plans, [and] make it less likely that new plans will be formed."

The reforms could even give employers an incentive to under-fund plans in order to avoid paying out promised benefits, according to Christian Weller, an economist with the liberal think tank Center for American Progress. Offering corporations this escape hatch, Weller told The NewStandard, would make workers pay for their bosses’ irresponsibility by "punishing people who have no control over what happens to the pension plan."

Pension-rights advocates say the legislation is laced with corporate giveaways that could undo crucial safeguards.

Pension reform could also shift the balance of power in labor negotiations, as some legislators cite instability in the pension system as a reason to curtail collective bargaining. In a letter to fellow lawmakers, House Majority Leader John Boehner (R-Ohio), who also chairs the Committee on Education and Workforce, called for "reasonable restrictions on the ability of employers and union leaders to make empty benefit promises when a plan is significantly underfunded." The House reform bill would bar employers from negotiating future benefit increases for plans less than 80 percent funded.

But labor groups view pensions as a crucial bargaining chip during labor negotiations, often offered in lieu of wage increases. They say that instead of expanding corporate accountability, the reforms would reduce workers’ leverage over their contracts.

Calling proposed restrictions "anti-worker legislation," Robert Betts, president of United Auto Workers Local 2151 in Michigan, said that by trying to restrict union advocacy, lawmakers "are blaming the UAW for negotiating a good deal for itself."

"We view pensions simply as deferred compensation for services rendered in the past," Betts said. "So we don’t view pensions as something that corporations or anybody should be allowed to just walk away from."

Corporate Nest Eggs

As profit motives push companies away from traditional pensions, some say legislative reforms could paradoxically accelerate such a trend.

The American Benefits Council, which represents employers and pension administrators, has warned that the reform proposals might deter companies from maintaining pensions, citing the financial burden of tougher funding requirements and unstable interest rates that cause yearly funding obligations to fluctuate widely.

Critics say the real problem is not that pensions are underfunded in the short term, but that they are simply vanishing.

The group’s Vice President Lynne Dudley told TNS: "When you ask people to be in a [traditional pension] system, you’re asking them to take on an obligation for many years. Well, they can only do that if they have some predictability."

At the same time, pension-rights advocates say the legislation is laced with corporate giveaways that could undo crucial safeguards established in the landmark federal pension law, the Employee Retirement Income Security Act of 1974.

The Pension Rights Center has opposed a proposal in the House bill to loosen regulations on financial-service providers, which are designed prevent conflicts of interest among companies that manage pension assets. In a letter to the congressional conferees last month, the Center wrote that the restrictions are vital "to ensure that pension assets are invested exclusively for the benefit of workers and retirees – not to enrich investment managers or others" closely connected to plans.

The National Retiree Legislative Network, a retiree-advocacy organization, supports increased funding requirements, but says the bill does not go far enough in strengthening disclosure requirements to inform employees when companies manipulate or under-fund pension plans.

Jim Norby, the group’s president and a retiree of Northwestern Bell Telephone, said that often, if employees want to know how their earned pensions are being invested, "they have not a clue, and nobody has to tell them nothing." Under the current system, he added, "there is no law that says they can’t screw the retirees out of what they promised them."

Retiree groups have also called on lawmakers to thwart proposals to legitimize conversions of pensions to "cash-balance" or "hybrid" plans, in which older workers are not rewarded for their seniority and see their benefits grow at the same level as those of new hires.

Companies have faced lawsuits charging that mid-career pension conversions have effectively reduced employees’ entitled benefits. In one major class-action suit, current and former IBM employees have contended that the company’s conversion to a cash-balance plan in the 1990s was age-discriminatory; the ongoing litigation has so far led to a partial settlement of more than $300 million.

The Senate bill would protect companies by limiting future lawsuits.

Janet Krueger, an IBM retiree who has helped organize employees at the company, commented that these caveats would "[legalize] something that’s purely being used to cut benefits, for no reason at all other than the companies saying, ‘We don’t want to be sued.’"

Krueger concluded, "So I don’t know who they think they’re helping, but they’re not helping us."

Some progressive analysts say the reform proposals betray the White House’s pro-business agenda, which has touted individual accounts like 401(k) plans as alternatives to traditional employer-sponsored pensions.

Referring to the Bush administration’s catch phrase, Nancy Hwa, a spokesperson for the Pension Rights Center, said, "It’s part of the whole idea of the ‘Ownership Society’... that you should be responsible for your own [well-being], whether it’s your health insurance or your retirement money or whatever. But the current system that we have now just does not work, in terms of providing sufficient retirement income."

Vanishing Benefits

Questioning whether the proposed reforms are needed at all, critics say the real problem is not that pensions are underfunded in the short term, but that they are simply vanishing. The Pension Benefit Guaranty Corporation reported last year that the portion of private-sector workers participating in government-insured traditional pensions dropped sharply from 35 percent in 1980 to less than 20 percent in 2002. The agency’s most recent data indicates that overall, nearly one in ten private pensions has been frozen.

Shaun O’Brien, the AFL-CIO’s assistant director for social policy, argued that the pension system’s vulnerability is due not to funding gaps in the PBGC or the private sector, but to "companies that are simply walking away because they can."

The bill’s critics say it ignores the value of offering workers a guaranteed stream of retirement income, and that no effective alternative has emerged to replace pensions.

Labor advocates say that 401(k) plans, which typically receive some funding from employers but do not guarantee set benefits, enable companies to cast off liabilities while leaving workers less financially secure.

Betts of the UAW said: "The corporations are trying to break the social contract that we had… And frankly, they’re not paying people enough money for them to afford to be able to provide that [security] for themselves."

Several progressive think tanks have modeled comprehensive retirement programs that would expand and strengthen the benefits system, especially for lower-income earners who generally lack pensions. Some proposals would establish nationwide mandatory benefits plans to essentially provide retirement security for the entire workforce.

But with Capitol Hill focused on the finances, rather than the structure of pensions, O’Brien said the question Congress should be asking is: "Are we going to have a system in which we expect employers to continue to play a role, to have a share of the responsibility in delivering retirement security?… Nothing in this legislation really begins to address that issue."


Major Change:

The sentence that now reads: "The agency estimated last fall that the private sector pensions it backs were underfunded by $450 billion" was corrected because the word "billion" was originally left out and to clarify that the pensions themselves are underfunded, not the agency.

 | Change Posted April 13, 2006 at 22:58 PM EST

Send to Friends Respond to Editors or Reporter

The NewStandard ceased publishing on April 27, 2007.

Online Sources
This News Article originally appeared in the April 13, 2006 edition of The NewStandard.
Michelle Chen is a staff journalist.

Recent contributions by Michelle Chen: